With redeemable preferred shares, the issuer has the right to redeem the outstanding stock from the buyers at a specific price. Redeemable preferred shares are also referred to as callable preferred shares. Retractable preferred shares give the buyer the right to sell the stock back to the issuer at a specific fixed price.
Preferred stock is an equity security, although it operates more like a debt security. Investors often refer to preferred stock as a hybrid security because it has both debt and equity features. By selling preferred stocks, companies receive equity. Companies use this equity for special projects, expansion or to improve their debt-to-equity ratio. Preferred stocks pay out dividends to its shareholders, much like debt securities. However, unlike debt securities such as bonds, dividends do not accumulate between payment dates.
Redeemable Preferred Shares
When you buy preferred shares, the company from which you buy the shares can buy them back on or after a specific date, and at the specific price listed on your preferred stock agreement. Preferred shares are also referred to as callable preferred shares because after the date on the agreement passes, the company can call the stock at any time and retire the shares. When a company retires preferred shares, it buys the outstanding shares at the call price plus any dividend arrearage so it can discontinue paying dividends.
Retractable Preferred Shares
Retractable preferred shares have a maturity date and a price noted on the stock agreement. When retractable preferred shares reach maturity, you have the right to sell them back to the stock issuer at the price stated on the agreement. If you do not want to sell your shares at maturity, the issuer can force you to do so. The issuer also has the option of exchanging retractable preferred shares for common shares instead of cash. This is referred to as soft-retractable preferred shares.
In return for your preferred stock investment, companies pay you a dividend but unlike common shareholders, you don’t get to own a piece of the company. If a company offers dividends on both preferred and common stock, the preferred stock dividends are higher. If the company files for bankruptcy, it has to pay off its debts first. Then, it pays its bondholders. and after that, it pays its preferred shareholders. If there is anything left, it will pay its common shareholders.
Sue-Lynn Carty has over five years experience as both a freelance writer and editor, and her work has appeared on the websites Work.com and LoveToKnow. Carty holds a Bachelor of Arts degree in business administration, with an emphasis on financial management, from Davenport University.